IRAs and other types of retirement accounts are great tools to help U.S. taxpayers financially plan for their retirement years. Taxpayers can make a contribution to their IRA which is a deduction from their taxable income, which saves them from paying income taxes on the contribution. Then, the tax law provides that the income earned by the IRA is tax deferred until taken out of the IRA, at which time it is taxed as income.
No taxes are paid on an IRA income until distributed to the IRA owner. As a result, most taxpayers will never take money out of their IRA unless they have to. To prevent taxpayers from never taking a distribution from their IRA, congress enacted the Required Minimum Distribution Rules.
The RMD’s main purpose is to force money out of an IRA, allowing the IRS to collect taxes on the amount distributed. If the RMD is not made in the year it should be made, there is a penalty based on the difference between the amount that should have been withdrawn and the amount that was withdrawn.
The problem with missing an RMD is; 1) there is a 50 percent penalty on the amount that should have been distributed, 2) the distribution is subject to income taxes when made, and 3) a second RMD has to be made in the same year the missing RMD is received to avoid the 50percent penalty for that year. Therefore, two distributions will be received in the same year. As a result, there is a bunching of two RMDs in one year, which most likely will push the taxpayer into a higher tax bracket.
Under the RMD rules, attaining age 70.5 is an important date for owners of IRAs. A taxpayer attains age 70.5 as of the date that is six months after the 70th anniversary of his or her birth. If the individual turns 70 before July 1, 2016, then they will turn 70.5 in 2016. If they turn 70 after July 1, 2016, then they turn 70.5 in 2017.
The RMD for each year that is required to be made from an IRA is found by dividing the account balance as of Dec. 31 of the preceding year by the life expectancy factor from a uniform table found in the IRS regulations. This table is used in all cases, except where the account’s designated beneficiary is the account owner’s spouse and the spouse is more than 10 years younger than the owner, in which case a different table is used.
The required beginning date for IRAs is an important date for retirees living in the Philippines. The tax law encourages you not to take money from your IRA prior to 59.5. Between 59.5 and 70.5 you can do whatever you want, leave your money in the IRA or take it. At age 70.5 you have to begin taking your RMDs or pay a 50 percent penalty for not doing so. You can wait to take the first distribution from the IRA until the following year after attaining age 70.5, as long as your take it prior to April 1st of that year. However, waiting is generally not good income tax planning due to the bunching of two RMD distributions into one year.
Remember, just because you are living in the Philippines, does not mean you do not have to take you RMDs.
_________________________________
Author’s email: [email protected]